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Latest Treasury Management Trends

Latest Treasury Management Trends

Prepared By

Bikramaditya Ghosh

Organizations face complex challenges in controlling and streamlining financial processes in order to improve the bottom line. The lack of visibility into cash positions and daily operational tasks on the part of Treasury managers has created a need for a dashboard to efficiently manage their return on cash. The Treasury Dashboard mostly given by PeopleSoft of ORACLE consists of a series of components which display cash management, deal management, and operational data in summary, detail and chart formats. These components enable executives and managers to gain a clear visual concept of the financial state of the organization in order to manage and monitor spending in real time, saving the time and money. The dashboard provides the cash position by bank or by currency, investment mix, debt mix and payment by source.
SunGard is a world’s reputed Treasury management organization. Recently they surveyed 164 corporations globally across the length and breadth of continents during the first half of 2014; 48% of the respondents were situated in North America and 90% of the companies are having a single centralized unit to manage the Treasury money. It has been quite a queer trend in the study that over the past years the proportion of companies increasing their cash balance is increasing steadily by approximately 6% YOY from 37% in 2012 43% in 2013 to 49% in 2014.However 33% of these companies are holding cash to fund either startups or invest in M&A. Whereas only 11% are holding cash to have a buffer plan in the recession times. This was 13% in the past few years. This dip signifies an improved investor confidence in global business scenario1.
In developing countries, governments often do not pay attention to issues related to cash management. Budget execution procedures and the management of cash flows focus on compliance issues, while daily cash needs in are met at low cost by the Central Bank. Spending units are not concerned with borrowing costs since their interests are already taken account in the budget prepared by the Ministry of Finance.2
During the financial crisis, corporations across the globe have learned, some the hard way, the value of placing more emphasis on effective cash and liquidity management. In times when the banks became increasingly restrictive and conservative in their lending policies in providing cash to corporations for smoothing any gaps in their cash flow curve or for investing in business development, corporations instead had to turn to their own resources and eke out every free penny. In order to mobilize their own resources, corporations need to have reliable data representing their real and expected cash position. Thus, if companies achieve greater efficiency in their accounts receivable and payable processing, they are laying a solid foundation for a strategic liquidity management structure: the more clearly they know where their cash is and what their cash requirements are over a certain period of time, the better they can steer their corporate ship through otherwise murky waters.
Without efficient cash flow forecasting, companies cannot analyze, track, and manage risk exposures that continuously challenge treasury. Maintaining optimal levels of liquidity is crucial for ensuring the continued success of a corporation. If companies have too much unused cash lying around in bank accounts or even in corporate in-house accounts, they will lose out on interest earnings and may even have to pay interest fees for external capital. If, however, corporations continuously operate under their minimum liquidity requisites, the consequences are worse and they risk bankruptcy or foreclosure.3
Last but not the least, the great management of Treasury has been found in India by Mr. R S Sodhi of Gujarat Cooperative Milk Marketing Federation Ltd. or popularly known as Amul. They purchase milk daily, and pay farmers at the point of delivery to one of their collection centers. Eighty per cent of payments are made in cash, although they are working with various banks as part of a financial inclusion programme to encourage producers to open bank accounts. However, with no ATMs in many villages, this will take some time, although they hope that around 80% of payments will be through banking channels in the next two or three years, particularly with new payment methods, such as mobile payments, now emerging strongly.
Having made payments to farmers, they then collect remittances from distributors. These distribution partners purchase milk from Amul on a „cash and carry‟ basis and Amul do not offer credit. Distributors and retailers provide post-dated cheques to Amul towards the payment of future milk supply orders. These cheques are sent to their bank, BNP Paribas, for clearing, settlement and reconciliation, and milk is supplied to the respective distributor/ retailer. Some of them are now using electronic payment methods.4
They (Amul) have found the robust plan to counter all loopholes and streamline their system,
1.     Build a robust receivables framework to handle paper-based clearing efficiently;
2.     Structure an electronic receipts solution to support the distributors that pay electronically;
3.     Establish a mobile banking solution to enable distributors to transfer funds 24/7 using mobile phones rather than account-based electronic transfers;
4.     Facilitate direct debits to enable us to „pull‟ cash in a controlled way.
By doing so, they would be able to reduce the administration overheads, support and promote the use of electronic payment methods, this in turn would shorten receivables cycle and create a scalable solution for the future. This move by Amul is surprisingly falling in line with the view of a seasoned North American Treasury tycoon Martin Bellin. 5According to him “There have been all kinds of „modernizations‟ in US payments, of course, such as scanning, remote printing and lockboxes, etc. But, in many ways these have just made global integration harder. And even if a corporation wanted to change their reliance on this payment form, many customers and employees are not prepared to accept electronic payments.”